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Update

Last month was an excellent month for my portfolio. I wrote about some of the significant moves that occurred over the first few weeks of May in this post, and I won’t repeat that discussion here. Apart from what was discussed there, I made only a few changes to my portfolio. I added Ambac (AMBC), which I wrote about here. I removed a number of the natural gas stocks, and I added a couple of new positions in the Health Care sector. I also subtracted and then added back some gold stock names, with the net sum of the moves being close to zero. Read more

I don’t provide regular updates on the stocks I own unless there is either meaningful news that I have an opinion on, or if I have added or sold a significant amount of the stock. I simply don’t have time to be writing updates all the time. I’ve tried to bridge that gap with twitter, and it does an ok job, but a lot of time you just can’t say as much as you want to because of the character limit.

Nevertheless there is a lot more going on behind the scenes then what eventually culminates in a post. During the first quarter I reviewed pretty much every earnings release and conference call of every company I own, and that isn’t to mention the number of releases and calls I reviewed of companies I considered owning, but for whatever reason decided not to.

One of the companies that I spent quite a bit of time on but haven’t said anything about is Comverse. I’ve owned about a 3% position in Comverse since mid-January when I posted my basic thesis here. Since that time the only thing that has happened is that the company has announced fourth quarter results.

I’ve reviewed the quarter, listened to the conference call a few times and read through much of the 10-K. Everything appears to be on track with respect to the improvements that the company has forecast to occur in 2013 and 2014. The company reiterated its guidance of $30 million of SG&A reductions by the end of 2013 and $45 million by the end of 2014. They reiterated mid-teen operating margin guidance for 2014. And the company said they expect revenues in 2013 to be slightly ahead of 2012 with a pick-up forecast in the second half of the year. The skew to second half bookings is because of the release of the new Comverse One BSS platform. They expect bookings of Comverse One to be higher margin business as customers transition to Comverse One platform which should be lower maintenance and less installation.

Just to remind us of what this guidance is going to look at when and if it comes to pass, here is a copy of the earnings I posted in my original post:

The carrot remaining enticing. EBITDA between $4 to $6 along with cash of $14 per share implies a share price of between $42 and $58 if the company gets a 7x EBITDA multiple.

But as you can see, all of heavy lifting is going to take place in the second half of 2013 and beyond. Until we start seeing some of those results, there is not too much information to give us insights to whether the company will reach its goals or not.

Still, it is encouraging that management has thus far exceeded its goals, and they gave some positive, albeit guarded, comments about the second quarter. In particular, there appears to be a pick-up in spending in some parts of the world and they said they are seeing a firming up of bookings as a result. And while I didn’t listen to any of the competitor conference calls, it was mentioned on the Comverse CC that this had been said by a competitor as well.

One unabashed positive for the quarter was that the cash level ended up higher than anticipated. Comverse ended the year with about $14 per share in cash. The absolute level of $305 million was up from an expectation of $285 million.

It also appears that they are making progress on their expenses. If you look at the company’s segment performance for the fourth quarter versus the first and make the same one-time segment expense adjustments that the company makes for its Comverse Performance metric, it appears that expenses from Comverse Other, which primarily consists of the corporate and SG&A expenses, dropped to $42 million in the fourth quarter versus $53 million in Q3. If you annualize that number (something that is perhaps not a wise thing to do so take this with a grain of salt), you see an expense reduction of $44 million.

But I’d be the first to admit that I’m not sure if this comparison can be made so directly. For the moment lets leave our conclusion to this being a potential positive trend that should be re-evaluated when the second quarter results are posted.

Comverse continues to look to me like a second half story with good potential. The fourth quarter results were strong enough for me to add slightly to my position, but there was not enough certainty to compel me to add substantially. I’m hoping that the first quarter results have a few more hints of an upswing, but hopefully not enough to cause the stock to take-off before I can add. I’d like to see Comverse be a big second half winner.

I started a position in Ambac this week. While I still have more work to do on the company, I’ve done enough to think its worth a starter position. As usual, it will grow as the stock trends up and if events arise that validate the thesis behind my purchase. I first got the idea for the stock after having read Christian Herzeca’s blog post that points to the benefit Ambac has accrued from MBIA’s legal trailblazing.

Much like every other company with a ticker the stock ran away from me on Friday and is already a couple of bucks above where I bought it. Yet despite the move, I don’t think this is a scenario you have to rush into. The catalysts to stock appreciation are all going to take time to play out:

A business plan that realizes the benefits of past net operating losses

Reversals of their RMBS loss reserves

Trial wins and/or settlements that add to shareholder value

About the only possible short-term catalyst I can imagine is if the company finds a merger partner that can take advantage of its NOLs. And given that the company is fresh out of bankruptcy, I doubt that is going to happen overnight. Read more

This last week has been jam packed full of news, earnings and outsized moves. I don’t think I have ever had as many 10%+ days for stocks that I own (or have recently owned but unfortunately sold) as I did in the last week. While some of these moves do not seem attributable to any specific news (such as First Mariner and Atlantic Coast Financial) most of them do. And while I have not had time to fully digest all of the news (I haven’t had time to review what announced spin-off for IDT and so therefore won’t be touching on that) I did want to discuss the stocks that I have reviewed and can comment on in the paragraphs below:

MBIA (MBI)

I sold out of MBIA in all but one account about two weeks ago, which is unfortunate timing given what has transpired. Nevertheless I had my reasons, they remain valid, and you gain little by looking back at bad luck. When the stock dipped into the $13’s on the day of the announcement I was really surprised, I mean the Bank of America deal was what we had all been waiting for, but I took advantage of the opportunity and loaded up the truck with stock. Therefore MBIA is a large position for me right now – it seemed very close to a sure bet in the mid-13’s and so I bought 11% position, going on some margin to do so.

At some point shortly I am going to have to reduce that position (I’m uncomfortable with it being this large) but I am waiting for at least the conference call tomorrow to do that. And what I do with my shares will really depend on what is said – in particular what management says about structured unit on call. They may come out and say that they have commuted the worst exposure, the unit isn’t going to regulator, and they expect to realize ABV of $10 from it. In that case maybe MBIA is worth quite a bit more than National alone. We shall see. Read more

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